Pricing of Innovations in Life Sciences A Teaser -

Transcription

1 Pricing of Innovations in Life Sciences A Teaser - Presentation Family Day of the HTGF Bonn, May 30, 2017 Dr. Klaus Hilleke Senior Partner Willy-Brandt-Allee Bonn Tel klaus.hilleke@simon-kucher.com

2 Overview Some basics on pricing Good pricing, bad pricing: Some examples How to find the right price Pricing challenges of the Life Sciences industry Key takeaways About Simon-Kucher & Partners Pricing of Innovations in Life Sciences.pptx 2

3 There are only three profit drivers PROFIT Price Volume - Cost Pricing of Innovations in Life Sciences.pptx 3

4 "Costs are a matter of facts Pricing is a matter of guts" Jack Welch Pricing of Innovations in Life Sciences.pptx 4

5 What is the most effective profit lever? Case example Price 100 Variable unit costs 60 Sales volume 1m Fixed costs 30m Pricing of Innovations in Life Sciences.pptx 5

6 What drives profits most? A 10% improvement in leads to a profit increase of... Profit driver Profit Fixed costs Sales volume Variable unit cost Old New Old New $30m $27m $10m 1m 1.1m $10m $60 $54 $10m? Price $100 $110 $10m Pricing of Innovations in Life Sciences.pptx 6

7 Price is THE profit driver A 10% improvement in leads to a profit increase of... Profit driver Profit Old New Old New Fixed costs $30m $27m $10m $13m 30% Sales volume 1m 1.1m $10m $14m 40% Variable unit cost $60 $54 $10m $16m 60% Price $100 $110 $10m $20m 100% Pricing of Innovations in Life Sciences.pptx 7

8 Conversely, price can be a profit destroyer: Case Universal Music Group Confronted with declining sales and competition from music downloads, UMG decided to cut the wholesale price by 30%. Old wholesale price: 100 Old sold units: 100 Cost per unit: 20 Old gross margin: (100-20) = 80 Old contribution margin: 80 x 100 = % price cut New wholesale price: 70 New gross margin: (70-20) = 50 Necessary volume to keep contribution margin constant: 160 (as 50 x 160 = 8000) Thus, UMG would have had to sell 60% more CDs to keep contribution constant which they did not achieve Source: Press reports, Simon-Kucher analysis Pricing of Innovations in Life Sciences.pptx 8

9 The three advantages of improving the price rather than costs Price improvements usually have three advantages over cost improvements: They require a lower up-front investment, become effective faster and yield higher sustainable profits. Profit Price improvement 3 Higher profits 2 Faster effect Time Lower up-front investment 1 Cost improvement Pricing of Innovations in Life Sciences.pptx 9

10 Overview Some basics on pricing Good pricing, bad pricing: Some examples How to find the right price Pricing challenges of the Life Sciences industry Key takeaways About Simon-Kucher & Partners Pricing of Innovations in Life Sciences.pptx 10

11 Let s clarify the "poor price" first: The example of Audi introducing its Q7 Example Situation What would have been the optimal price? Possible volume decrease: -10,000 units/80,000 units = -12.5% Possible price increase: volume/ = -12.5%/-2 = % Launch: Q Ø price 55,000 Demand (units per year worldwide) approx. 80,000 Production capacity (units per year) 70,000 units Assumed price elasticity: = -2 Optimal price: 55,000 x = 58,440 Profit impact: 3,440 x 70,000 units = 240,800,000 Price below consumers willingness to pay Giving away significant profit Building up a long waiting list Pricing of Innovations in Life Sciences.pptx 11

12 But what is a good price? The example of Porsche introducing its Cayman S coupé Example Prices in the German Market (incl. VAT) Difference Coupé Convertible Convertible Porsche 911 Carrera % BMW 630i % MB CLK % Nissan 350Z % Price position of Cayman S? Audi TT % BMW 330Ci % Chrysler Crossfire % Simon-Kucher s price recommendation 83, Precondition: Differentiation from Boxster S Good price factors More power: + 15 hp Know and quantify the value drivers Cayman S 60,300 54,700 Boxster S Different product name Specific positioning Innovation and creativity Think outside the box Pricing of Innovations in Life Sciences.pptx 12

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14 Result Second biggest new product flop in 2012 after the Apple iphone map Disastrous sales performance, in best year only 87,000 units Production stopped in Sep 2016 From This is the one car where we cannot afford to get it wrong Sergio Marchionne, CEO Fiat, 2011 To I don't know one investment that was as bad as this one Sergio Marchionne, CEO Fiat, 2016 Pricing of Innovations in Life Sciences.pptx 14

15 Insights from the Global Pricing Studies 2014/2016 report increasing 83% price pressure and see innovative products as 77% the best/only way out but of new products do not 72% meet their profit targets of companies did not have a single product, which 25% met profit expectations 80% neglect pricing & marketing in the NPD 2) process 1) Global Pricing Study; 1,615 companies across the world; 39% C-level executives Pricing of Innovations in Life Sciences.pptx 15

16 Key Learning Good pricing is not only about setting the price. It is much more about ensuring that new products are brought to market in a format that customers want and at a price that customers are willing to pay and that maximizes the return on investment. Pricing of Innovations in Life Sciences.pptx 16

17 Overview Some basics on pricing Good pricing, bad pricing: Some examples How to find the right price Pricing challenges of the Life Sciences industry Key takeaways About Simon-Kucher & Partners Pricing of Innovations in Life Sciences.pptx 17

18 Getting the right price is critical in Life Sciences Despite the challenges of accurate value measurement and price determination, the importance of choosing the right price can not be overstated. Profit driver Price is the most powerful profit driver Inadequate attention to pricing Leaving money on the table when Life Sciences innovations are priced too low Jeopardizing adoption when Life Sciences innovations are priced too high Wrong messages being sent to the market if price is not aligned with the product s perceived value Pricing in Life Sciences Most Life Sciences companies revenue streams rely on a handful of products Pricing research for Life Sciences innovations minimizes the risk of making the wrong pricing decision Pricing mistakes for Life Sciences innovations cannot be easily corrected (e.g. limited opportunities for post-launch price increases in most countries if priced too low; restrictions already in place if product is priced too high (sticker shock effect)) Pricing of Innovations in Life Sciences.pptx 18

19 How to monetize innovations in the future? Map current environment Understand added value and willingness to pay Breakthrough: Define market access strategy Develop monetization strategy Detail monetization strategy Implement strategy Map environment along: Current products Strength and weaknesses Resulting unmet needs Current reimbursement Consider segmentspecifics Identify value drivers Understand value perception Understand willingness to pay Identify reimbursement gaps Understand payer perception and evidence requirements Define market access strategy Define options to monetize innovation Assess options Select optimal strategy Potentially differentiate by country cluster Design offer and packages Detail price model Define optimal price Develop pricing guideline Develop value communication Provide input to trial program Align with countries Create sales materials and tools Train sales organization Define KPIs Monitor implementation success Continuous alignment with countries Pricing of Innovations in Life Sciences.pptx 19

20 Price strategy development is not a one-time event... but involves a specific set of important activities during each stage of the product life cycle. Key pricing process priorities at each stage of product development Preclinical Phase I Phase II Phase III Filing/ premarketing Launch/ contracting Post-launch price management Market assessment Pricing environment NPV calculations Business planning Planning for full therapeutic potential of the product (across possible uses and indications) Technical assessment Definition of comparators' value Definition of endpoints' value Identification of market segments Benchmarking of Best Pricing Practices Health economics First price scenarios Market potential assessment Pricing / reimbursement barriers Reanalysis of value scenarios Monitoring of competitors Reassessment of pricing strategy Decide on launch pricing strategy (taking into account post-launch price strategy objectives) Develop market access strategy Develop pricing support material Launch approval Negotiate prices / contracts with managed care Dispensation procedure Monitor launch process Develop postlaunch price strategy (price changes due to new indications, formulations, competitor moves, new market entrants, administrative price cuts, generics, international price referencing) Monitor and control prices / contracts with managed care Responsibility of headquarters Responsibility of affiliates Increasing need for market-specific expertise Pricing of Innovations in Life Sciences.pptx 20

21 How to set The Right Price for a Life Sciences innovation? Cost-Plus Approach Right Price for a Life Sciences Innovation? Competitor- Price Approach value Value-to- Customer Approach Pricing of Innovations in Life Sciences.pptx 21

22 Cost-based pricing leads to sub-optimal pricing decisions Customer willingness-to-pay Pricing Below Willingness-to-Pay Pricing Above Willingness-to-Pay Price Price Willingness to pay Margin goal Gap Margin Margin goal Margin Costs Costs Costs Costs Cost-plus Cost-plus Price too low Unexpected high demand cannot be satisfied due to limited capacities Gap between potential margin and achieved margin Price too high Low demand leads to the under-utilization of capacities and increased per unit cost Smaller margin than expected Overall much smaller profit since sales not as high as expected and possible Pricing of Innovations in Life Sciences.pptx 22

23 Competitive pricing might also not be optimal Competitively Pricing a New German Car BMW 3er Coupe 325i BMW 3er Compact 323i Audi A3 VW Golf New car (e.g., Mercedes- Benz A or B Class) Competitive pricing can be challenging without having a sense of your product s value Which competitor is the right benchmark? Should we price at parity, a premium or a discount to that benchmark? How much of a price premium/discount is optimal? Is the price set by the competitor right per se? What is the net price of the competitor? Basing a pricing strategy on competitive behavior is not necessarily optimal. Pricing of Innovations in Life Sciences.pptx 23

24 Competitor-based pricing: Using competitive benchmarks Existing competitors or treatments serve as pricing benchmarks in many disease categories and market environments. However, care should be taken on price sustainability if price used as a competitive lever. Conceptual Competitors serve as important benchmarks Competitors may be able to match any price differential Price Price of existing brand / Price of new entrant Price decline Simple Effective for highly competitive areas and wellestablished benchmarks Time Potential for undervaluation" of innovative products Requires market intelligence Could lead to price deflation Pricing of Innovations in Life Sciences.pptx 24

25 A famous quote "Customers don't buy products, they buy the benefits that these products and their suppliers offer to them." Peter F. Drucker Pricing of Innovations in Life Sciences.pptx 25

26 What is price? Price is the reflection of value as perceived by customers. Perceived Value Optimal Price Perception counts, not reality! Pricing of Innovations in Life Sciences.pptx 26

27 What is the ultimate objective of your pricing strategy? Before determining an optimal price for a Life Sciences product, you have to have a clear objective for its pricing strategy. What is the ultimate goal of a pricing strategy in life sciences? Resulting strategy Market share Profit Market share Profit Pricing strategy leading to maximum market share Pricing strategy leading to maximum profit Pricing strategy leading to maximum price Price Pricing of Innovations in Life Sciences.pptx 27

28 Many factors influence value Disease Area Unmet need Product benefits and risks Competitors Positioning Perceived Value Target population Quality of clinical trial data Health economic data Quality of economic evidence Company Pricing of Innovations in Life Sciences.pptx 28

29 Lets assume you know the price sales interaction, but where is the optimal price? Sales Optimal price Price Pricing of Innovations in Life Sciences.pptx 29

30 Relation between price and revenue/profit There is always an optimal price! Product demand & profit at different prices Market share/ revenue/ profit Revenue/Profit Sales Too inexpensive Optimal price Too expensive Price Too low margin High volume Higher willingness-to pay of market right! Too high margin Low volume Untapped potential due to high price Pricing of Innovations in Life Sciences.pptx 30

31 The price-response function and price elasticity Price elasticity is a key concept in price management and links the relative change in volume to the relative change in price based on the demand curve. 1,8 1,6 1,4 1,2 1 0,8 0,6 0,4 0,2 0 Volume Price Volume changes as a result of price changes? Price elasticity (e) = Cross price elasticity (e) Volume change (%) = Price change (%) Volume change product B (%) Price change product A (%) Pricing of Innovations in Life Sciences.pptx 31

32 Market share Market share Market share Market share Various types of price sensitivity: Examples The term price sensitivity typically describes the overall response of a specific market to price changes. The price response curve illustrates the price sensitivity. Comfort Low Medium High Price Price Price Price Characteristics: Characteristics: Characteristics: Characteristics: No price sensitivity (i.e. price changes will not affect market share) Example: product with no substitutes, usually at the beginning of the product life cycle Low degree of sensitivity to price changes Example: product with no easily substituted product, but comparable products do exist Average price sensitivity Example: product with many substitutes. No real differentiation Price volume considerations High price sensitivity Example: product with many substitutes. No real differentiation Price volume considerations (ε = 0) (0>ε >-1) (ε = -1) (ε < -1) Pricing of Innovations in Life Sciences.pptx 32

33 Price elasticity varies significantly across product categories Over the lifecycle of a technology price elasticities may undergo a significant shift. Elasticity Industry example Pharma/Biotech//MedTech products (Simon-Kucher & Partners project examples) < to to to -2.0 Price promotions: <-6 Single products in a broader portfolio Generics in pharmaceuticals Airlines: -3 to -5 Mobile Teleph. (new contracts): up to -5 Luxury cars: -1.8 to -3 Industrial services: -1.5 to -2.5 Consumer goods: -2 to -3 Mobile telephone (air time): -0.5 to -1 Surcharges; online fees (e.g. ebay) Computer/software services: -1.2 to -2 0 to -0.5 Innovative pharmaceuticals: -0.2 to -0.7 Very high High Medium Low Very low Physician preference item Commodity type Pricing of Innovations in Life Sciences.pptx 33

34 Price elasticity varies significantly across product categories Over the lifecycle of a technology price elasticities may undergo a significant shift. Elasticity Industry example Pharma/Biotech//MedTech products (Simon-Kucher & Partners project examples) < to to to -2.0 Price promotions: <-6 Single products in a broader portfolio Airlines: -3 to -5 Mobile Teleph. (new contracts): up to -5 Luxury cars: -1.8 to -3 Industrial services: -1.5 to -2.5 Consumer goods: -2 to -3 Mobile telephone (air time): -0.5 to -1 Surcharges; online fees (e.g. ebay) Computer/software services: -1.2 to -2 0 to -0.5 Innovative pharmaceuticals: -0.2 to -0.7 Very high High Medium Low Very low Physician preference item Commodity type Products with generic equivalents Low-involvement supplies Convective warming disposables Drug-eluting stents (>3 yrs after launch) Me-too pharmaceuticals Imaging equipment Drug-eluting stents (launch) CRM market Innovative oncology products Immunoassay analyzer systems Orphan drugs Pricing of Innovations in Life Sciences.pptx 34

35 Value-based pricing best matches willingness-topay with price Pricing method Cost-based pricing Competitor-based pricing Value-based pricing Definition Pricing based on cost of manufacturing the product plus a specified margin Pricing based on how competitors price their products (discount or premium to competition) Pricing based on the perceived value to the customer Simplest and fastest Minimal information needed Simple Effective for me-too products with wellestablished benchmarks Takes into account customer willingnessto-pay "Smart"/profit-optimal pricing decisions Sub-optimal pricing decisions Easily leads to profit loss from either not satisfying high demand or underutilization of capacity May lead to price wars "Undervaluation" of innovative products and services Requires market intelligence Reliable data needed Strong analytical and methodological skills required Requires committed resources Pricing of Innovations in Life Sciences.pptx 35

36 Overview: Value measurement and pricing research tools and methodologies In order to ensure high validity and robustness of results various methods should be combined within a multimethod, multi-source approach. Value Perception Level of satisfaction, value drivers and unmet need measurement Improvement scale Matrix of Competitive Advantages (MCA) MaxDiff Multidimensional scaling (MDS) Using pricing more successfully and efficiently Pricing Direct Pricing Methods Price perception Gabor Granger Van Westendorp price sensitivity meter Direct price response Indirect Pricing Methods Conjoint Measurements ACA¹ DCM² ; 1Adaptive Conjoint Analysis; 2Discrete Choice Modeling Pricing of Innovations in Life Sciences.pptx 36

37 Overview Some basics on pricing Good pricing, bad pricing: Some examples How to find the right price Pricing challenges of the Life Sciences industry Key takeaways About Simon-Kucher & Partners Pricing of Innovations in Life Sciences.pptx 37

38 Some key lessons from the Global Pricing Study apply also to the HealthCare market 1. Downward pressure on prices is at unprecedented levels 2. Pricing power the ability to achieve higher prices has plunged to its lowest level in five years 3. Launching new products is by far the best option to escape these oppressive conditions 4. Most new products fail to meet profit targets, putting companies profits and survival at risk Does this apply also to the HealthCare business? YES! Net price implementation more important than ever Price increases are relevant in the OOP Rx, OTC, MedTech and animal health space Truly innovative pharmaceuticals can still command high prices YES! Many pharmaceutical companies are still successful in launching blockbusters However some failed, with dramatic consequences Pricing of Innovations in Life Sciences.pptx 38

39 LS pricing is more complex with multiple stakeholders Payers National Regional Hospital Sets restriction/ prescribing criteria Sets coverage decision and subsequent OOP level Provides feedback on treatment Advocates coverage Physicians Hospital Private practice Prescription Requests Patients/caregivers Patients Family members Advocacy groups (particularly in rare diseases). OOP: Out of pocket Pricing of Innovations in Life Sciences.pptx 39

40 Price referencing by countries outside of Europe can often have a significant cross regional impact While developed markets in the EU typically reference each other, emerging markets tend to use a more diverse selection of markets. Conceptual US one of the few that does not Extensive referencing within the EU Outside the EU, crossregional referencing common Formal price referencing ; IMS Pricing of Innovations in Life Sciences.pptx 40

41 Country-specific, international and inter-temporal issues need to be considered when developing a pricing strategy 1 Consideration of country-specific parameters 2 Consideration of international interactions 3 Consideration of intertemporal interactions Product's pricing and value proposition Physicians' price sensitivity in the different indications Payers' thresholds and restrictions depending on price Performance expectation Parallel trade Market sizes: incidence, share of patients treated International referencing rules International business strategy Launch dates of new competitors across countries Development of market penetration rates Expected delay and duration of P&R negotiations. Market shares Price level of current products Pricing and value propositions of new competitors Scenario III Scenario II 100% 80% 60% 40% 20% 0% Maximum price Europe Minimum price Europe Max. price America Min. price America Scenario I 100% 80% 60% 40% 20% 0% Determination of the revenue/profit optimal price range per country Determination of the international revenue/profit optimal price range Determination of the revenue/profit optimal pricing strategy per scenario Pricing of Innovations in Life Sciences.pptx 41

42 Increased cooperation and sharing of information on prices and pricing policies across Europe The Netherlands Presidency of The European Union, first half 2016, plans to focus on European cooperation on drug prices and on bringing innovative medicines to the European market faster and at affordable prices 1 EU ministers agree to keep on sharing pricing information 18 December 2014, Scrip The EU's 28 member states have signed off an agreement to continue sharing information on medicine prices. The news comes after France rallied other EU member states to discuss the price of Gilead's Sovaldi (sofosbuvir), after which the French health Belgium and The Netherlands agreed on a joint negotiation pilot: The focus at present is on orphan drugs that treat rare diseases. There is no plan to extend beyond orphans but we are not excluding anything 1 Other countries announced their interest in joining the scheme Triggered by medicines such as Sovaldi 2, France spearheaded a drive last year among EU members to create joint purchasing arrangements, but price negotiations took place country by country, 1 Communication by the MoH of The Netherlands, 20 April 2015, and 2 for Hepatitis C, a Gilead product Pricing of Innovations in Life Sciences.pptx 42

43 Pharmaceutical pricing is high profile and visible This scrutiny is likely to get higher as products serve ever more targeted populations at higher mono and combination prices. Increased media scrutiny of pharmaceutical drug pricing practices May 8, 2014 October 1, 2014 "Valeant Latest Congressional Target Over High Drug Prices" Scrip, August 17, 2015 Sept. 22, 2014 April 25, Pricing of Innovations in Life Sciences.pptx 43

44 Controlling net prices is a key element of pricing power Deal types Deal types Level of formalization Market access agreements Commercial agreements Simplified Tenders Big deals Small deals Issuing body National/regional authority Public hospitals Regional/national authority Public sick funds Group of private chains (e.g. hospitals, pharmacies, wholesalers) Single hospitals Pharmacies Wholesalers Typical responsibilities P&MA Commercial, in some cases P&MA Commercial, Finance Commercial, Finance Typically developed by Global Global/regional Regional/local Regional/local Pricing type Product pricing Product and customer pricing Customer pricing Customer pricing Pricing of Innovations in Life Sciences.pptx 44

45 Innovation can command premium prices and secure sustainable business What happens if pipelines runs dry Premium price innovations Diabetes Human insulin Metformin/ SU Insulin analogs DPP-IV/GLP1 Altana Solvay Anticoagulant treatmet ASA Antiplatelet agents Nycomed Schwarz Pharma Knoll Schizophrenia/ MDD Typical antipsychotics (e.g. haloperidol) Atypical antipsychotics (e.g. quetiapine) RA Methotrexate TNF-a inhibitors Hoechst/ Aventis Wet AMD Photocoagulation Anti-VEGF agents Schering Plough Cholesterollowering agents Statins PCSK9 inhibitors Lysosomal storage diseases Nothing ERTs Pricing of Innovations in Life Sciences.pptx 45

46 Overview Some basics on pricing Good pricing, bad pricing: Some examples Pricing challenges of the pharmaceutical industry Key takeaways About Simon-Kucher & Partners Pricing of Innovations in Life Sciences.pptx 46

47 Key takeaways Price has a much more direct and more significant impact on profit than any other marketing instrument "Costs are a matter of facts, pricing is a matter of guts" There are many ways to use price to increase profit Increasing price pressure is a global phenomenon across all industries Launching new products is the best way to counter this pressure For new products to be commercially successful, pricing has to be considered early on in the development process The level and complexity of price and access regulation is the pharma market's key distinguishing characteristic In addition, there are many more stakeholders involved. And some of these stakeholders are globally connected Bringing successful new products to market that reach their profit targets is the only long term survival strategy A pharmaceutical company's pricing function and pricing process are even more critical for success Pricing of Innovations in Life Sciences.pptx 47

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49 Global presence 33 offices worldwide, >1000 employees, 240m revenue in 2016 Americas Europe Brazil, São Paulo Canada, Toronto Chile, Santiago USA, Atlanta USA, Boston USA, Mountain View USA, New York USA, San Francisco Asia-Pacific/ the Middle East Australia, Sydney China, Peking Japan, Tokyo Singapore, Singapore UAE, Dubai Austria, Vienna Belgium, Brussels Denmark, Copenhagen France, Paris Germany, Bonn Germany, Cologne Germany, Frankfurt Germany, Hamburg Germany, Munich Italy, Milan Luxembourg, Luxembourg Poland, Warsaw Spain, Barcelona Spain, Madrid Sweden, Stockholm Switzerland, Geneva Switzerland, Zurich The Netherlands, Amsterdam Turkey, Istanbul United Kingdom, London Pricing of Innovations in Life Sciences.pptx 52

50 Dr. Klaus Hilleke Profile CEO Willy-Brandt-Allee 13 D Bonn Tel.: Mobile: simon-kucher.com Klaus Hilleke is a Senior Partner at Simon-Kucher's Global Life Science Practice. From May 2009 to December 2016, Klaus was Co-CEO of Simon-Kucher, together with Dr. Georg Tacke. From 1996 to 1999 he was the founding partner and managing director of the company s US operations in Boston, Massachusetts. He has been with the company since 1988 and has been a member of the Executive Board since From 2000 to 2013 he was head of the Global Life Sciences Division. Klaus specializes in the areas of competitive strategy, market segmentation, positioning and pricing for pharmaceutical companies. He has worked for many of the leading pharmaceutical and biotech companies as well as for Start-up companies in the Americas, Europe and Asia. He has taught at the University of Bielefeld and the German Management Development Institute in Cologne, and is a regular speaker at the conferences and seminars. He has written or edited two books on competitive strategy in the pharmaceutical industry and has published many articles on pricing, reimbursement, competitive strategy, marketing and pricing in leading journals. Klaus started his business education as a trainee with Siemens AG, studied business administration at the University of Bielefeld and received his MBA in He was a visiting scholar at the University of California, Los Angeles, in 1985/86. In 1988 he received his Ph.D. from the University of Bielefeld. Pricing of Innovations in Life Sciences.pptx 53